Journal of Multinational Financial Management

12 (2002) 159– 169

www.elsevier.com/locate/econbase

Liquidity management, operating performance,

and corporate value: evidence from Japan and
Taiwan
Yung-Jang Wang *
Department of Finance, National Chung Cheng Uni6ersity, Chia-Yi 621, Taiwan, ROC

Received 24 July 2000; accepted 5 January 2001

Abstract

This study examines the relationship between liquidity management and operating perfor-
mance, and that between liquidity management and corporate value for firms in Japan and
Taiwan. We observe that the cash conversion cycle (CCC)– returns on assets (ROA) and
CCC–returns on equity (ROE) relationships are commonly negative and sensitive to
industry factors. Both Japanese and Taiwanese firms with q\ 1 have significantly lower CCC
than firms with q01. In addition, Japanese firms with q\ 1 have significantly higher ROA
and ROE than firms with q0 1. Overall, the findings indicate that aggressive liquidity
management enhances operating performance and is usually associated with higher corporate
values for both countries in spite of differences in structural characteristics or in financial
system of a firm. © 2002 Elsevier Science B.V. All rights reserved.

JEL classification: G39

Keywords: Liquidity management; Operating performance; Corporate value

1. Introduction

Liquidity management, though many times a neglected aspect in financial manage-

ment, occupies a major portion of a financial manager’s time and attention. In a sense,
a deficiency of liquidity implies that the firm is unable to take advantage of favorable
discounts or profitable business opportunities as they come into being. A serious

* Tel.: + 886-5-272-0411x6219; fax: + 886-5-272-0818.

E-mail address: finyjw@ccunix.ccu.edu.tw (Y.-J. Wang).

1042-444X/02/$ - see front matter © 2002 Elsevier Science B.V. All rights reserved.
PII: S 1 0 4 2 - 4 4 4 X ( 0 1 ) 0 0 0 4 7 - 0
160 Y.-J. Wang / J. of Multi. Fin. Manag. 12 (2002) 159–169

insufficiency of liquidity means that the firm is lacking ability to pay its current debts
or other obligations. This may, in turn, result in the forced sale of investments and
properties and, in its most severe condition, to insolvency and bankruptcy.
Financial practitioners perceive that traditional measures of corporate liquidity
(such as the current ratio, the quick ratio, and even net working capital) are static
in terms of what cash resources are ready for use at a given moment in time to satisfy
the current obligations. The existing supply of cash resources does not have a
causative relationship to the cash that will flow through it. Static liquidity indicators
underline basically a liquidation approach to liquidity analysis, rather than a
going-concern. Gitman (1974) notes the limitations of traditional ‘static’ ratios and
starts to advocate the use of the operating approach— a cash conversion cycle (CCC)
to liquidity analysis. Then, a flowing concept of liquidity is developed by extending
the static balance sheet analysis of potential liquidation value coverage to include
income statement measures of a firm’s operating activity. From this point of view,
Richards and Laughlin (1980) argue that investors should focus their concern on two
things: (1) avoiding default situations by emphasizing a firm’s ability to cover its
obligation with cash flow from mobilizing inventory and receivable investments
within the normal course of the firm’s operations and (2) keeping these operating cash
flows sensitive to declining sales and earnings during periods of economic adversity.
The CCC focuses on the length of time between the company making payments
and receiving cash flows. In other words, it is the net time interval between actual
cash expenditures on a firm’s purchase of productive resources and the recovery of
cash receipts from product sales. The CCC measure explicitly recognizes that the life
expectancies of some working capital components depend upon the extent to which
four basic activities— purchasing/production, sale, collection, and payment— are
fulfilled noninstantaneously and unsynchronizedly. The CCC is a dynamic measure
of ongoing liquidity management in the sense that it combines both balance sheet
and income statement data to generate a measure that tells a time difference.
According to Richards and Laughlin (1980), the interrelationship among a CCC, an
inventory conversion period, a receivables conversion period, and a payables
conversion period can be illustrated in Exhibit 1.

Exhibit 1. Cash conversion cycle.

 Y.-J. Wang / J. of Multi. Fin. Manag. 12 (2002) 159–169 161

As the world financial market has become more integrated since the 1980s, an
unprecedented scale of financial crises broke out in Asia, Russia, and Latin
America during 1997– 1998. Those crises have adversely affected the world eco-
nomic growth and financial stability. Since July 2, 1997, the day Thailand allowed
her Baht to float, many Asian countries, including Japan, have suffered financial
crises. However, most firms in Taiwan have not been greatly influenced by the crisis
at that time.
Japan is a well-developed, small nation with advanced and innovative technology
in almost every sector of its economy. This well-diversified economic structure has
enabled it to be ranked among the top economic players in recent years. Also,
recently, the Government of Taiwan has redirected its economic progress towards
the development of high technology industries, with the semi-conductor industry
being recognized as a global star performer.
Taiwan is less affected by Asian flu than its surrounding countries, due to its
good economic fundamental, the well-managed financial system, the comparatively
high saving rate of householders, few foreign debt, and particularly, the vitality and
flexibility of small- and medium-sized firms. The organizational structure of
Japanese firms is totally different from that of Taiwan’s. After World War II,
keiretsu (corporate groups) send their roots into financial institutions and are
interconnected horizontally or vertically in Japan. Most of Japan’s financial system
and heavy industry are closely related. In contrast, most Taiwanese firms are small
to medium in size and are family owned. The liquidity management of firms
operated in these two nations is different.1 With a different impact of Asia flu on
national economy and a different organizational structure of firms between Japan
and Taiwan, it would be instructive, therefore, to examine liquidity management,
operating performance and firm value observed in these two countries. The purpose
of this study is twofold. One is to examine the relationship between liquidity
management and operating performance. The other is to investigate the relationship
between liquidity management and corporate value for firms listed on the Tokyo
and the Taiwan Stock Exchange. Hopefully, this can bring to light more about
firms’ financial management in Japan and Taiwan. In a word, this empirical
research will provide a rigorous test for the robustness of the CCC model in
explaining the variation of operating performance and corporate value for firms in
these two nations. Besides, in view of the relative paucity of financial literature on
liquidity management, this study attempts to substantiate additional evidence to
make up the missing link between the theory and practice of liquidity management.
The remainder of this paper is divided into following sections: Section 2 describes
the background information on the empirical relationship between liquidity man-
agement, operating performance and Tobin’s q ratio. Section 3 presents the data

1
Chiou (1998) points out that, in a typical keiretsu, the main bank system of industrial finance and
corporate governance is one of the most distinguished aspects of capital market organization in Japan.
This close bank –firm relationship, which often affects the liquidity management of firms cannot be
found in US, Taiwan or other countries.
162 Y.-J. Wang / J. of Multi. Fin. Manag. 12 (2002) 159–169

and the methodology used. Section 4 documents the analysis and results. The paper
concludes with a summary of the findings.

2. Liquidity management, operating performance and Tobin’s q ratio

Management of a firm’s CCC involves tradeoffs between liquidity and operating

performance. If the inventory conversion period is reduced too far, the firm risks
losing sales due to stockouts. Similarly, if the receivables conversion period is
reduced too much, the firm risks losing business from customers requiring credit.
Increasing the payables deferral period too much may result in losing discounts for
early payments or flexibility for future debt. A cursory inspection of recent
empirical studies related to liquidity management shows that the results are quite
controversial.2
Hager (1976) points out that firms having lower (or shorter) CCC usually
correspond with better operating performance. He argues that a low CCC allows
managers to minimize holdings of relatively unprofitable assets such as cash and
marketable securities. Furthermore, a low CCC preserves the firm’s debt capacity
since less short-term borrowing is required to provide liquidity. Finally, a lower
CCC corresponds to a higher present value of net cash flow from a firm’s assets.
Kamath (1989) demonstrates a negative relationship between the net trade cycle, a
measure closely correlated with the CCC, and operating performance in the Retail
Grocery industry.3 The findings, however, do not hold for every year of the study.
Moreover, Jose et al. (1996) also provide strong evidence how aggressive liquidity
management enhances operating performance. However, Czyzewski and Hicks
(1992) reveal to the contrary that successful firms have a high relative concentration
of cash assets, and that high levels of cash can actually produce higher than average
ROA. Soenen (1993) shows that the net trade cycle does not necessarily form a
consistent relationship with the total rate of ROA for a wide range of industries.
Finally, Shin and Soenen (1998) demonstrate that there is a strong negative
relationship between the length of the firm’s net trade cycle and its profitability.
Firms with shorter net trade cycles are usually associated with higher risk-adjusted
stock returns.
In addition, a growing number of empirical studies have employed Tobin’s q
ratio to categorize companies according to their relative performance (Morck et al.,
1988; McConnell and Servaes, 1990; Cho, 1998). Tobin’s q goes high when the firm
has valuable intangible assets in addition to physical capital, such as monopoly
power, goodwill, a stock of patents, or good managers.

2
According to Czyzewski and Hicks (1992), firms with high levels of cash can produce higher than
average ROA. In contrast, Hager (1976) argues that firms having less cash assets usually correspond
with better operating performance.
3
Shin and Soenen (1998) point out that net trade cycle is basically equal to the CCC except that all
three components (i.e. number of days inventories, accounts receivable, and accounts payable) are
expressed as a percentage of sales.
 Y.-J. Wang / J. of Multi. Fin. Manag. 12 (2002) 159–169 163

3. Data and methodology

We examined both (1) the relationship between liquidity management and

operating performance, and (2) the relationship between liquidity management and
corporate value for Japanese and Taiwanese firms over an 11 year period. Data for
Japan are retrieved from the PACAP Database-Japan, compiled by the Pacific-
Basin Capital Market Research Center (PACAP) at the University of Rhode Island.
Data for Taiwan are retrieved from the Database of Taiwan Economic Journal
(TEJ), an institute that collects financial data on Taiwan’s stock market.
In order to reflect the latest situation as well as maintain comparability, our
testing horizon covers from January 1985 to December 1996. Any firms in the
PACAP or TEJ data set without complete information are deleted from the sample
for further analysis. The final sample consists of 1555 firms for Japan and 379 firms
for Taiwan.
Operating returns on assets (ROA) and pre-tax returns on equity (ROE) are used
to determine if financial structure differences affect the relationship between CCC
and operating performance. In addition, Tobin’s q ratio is employed to serve as a
proxy for corporate value, examining whether aggressive liquidity management is
associated with a higher q ratio. Finally, industry influences are controlled by
conducting a grouping analysis for each different industry.
Following Jose et al. (1996), we apply both ROA and ROE to separate asset
management and financing influences on profitability. The ROA measure is defined
as earnings before interest and taxes (EBIT) divided by total assets.
ROA = EBIT/TA (1)
The ROE measure is defined here as earnings before taxes (EBT) divided by
common stockholder equity.
ROE =EBT/Equity (2)
The difference between pre-tax ROE and ROA measure can be explained as
follows.
EBT/Equity =(EBIT/TA)(EBT/EBIT)(TA/Equity)
Everything on the right of the ROA measure (EBIT/TA) is due to financing. In
addition, the CCC is used as the measure of corporate liquidity,
CCC =Inventory convention period+ Receivables conversion period
− Payable deferral period
where Inventory conversion period is Inventory/(Costs of goods sold/365); Receiv-
ables conversion period is Accounts receivables/(Sales/365); and Payable deferral
period is Accounts payables/(Costs of goods sold/365).
Finally, Tobin’s q is used as the measure of corporate value. As in Lang and
Litzenberger (1989), Tobin’s q is defined as the sum of market value of common
stock (C), preferred stock (P), book value of long-term debt (LD) and short-term
164 Y.-J. Wang / J. of Multi. Fin. Manag. 12 (2002) 159–169

debt (SD) divided by replacement costs of net plant and equipment and inventories
(RC).
q =(C + P +SD +LD)/RC (3)

4. Analysis and results

Table 1 presents the summary statistics of CCC for the total sample of Japanese
firms by industry classifications in Panel A and those of Taiwanese firms in Panel
B. As observed from Panel A, the lowest mean value of CCC is in the foods
industry and the highest mean value is in the service industry. The service industry
produces the highest range of CCC values. When the CCC standard deviation is
divided by the mean level of the CCC (or the coefficient of variation of the CCC),
Table 1
CCC summary statistics for Japanese and Taiwanese firms by industry classifications

Industrya Number of Mean Maximum Minimum CVb of

firms CCC CCC CCC CCC

Panel A: Japan
301 — Foods 88 43 311 −30 1.05
302 — Textiles 64 90 345 −2 0.68
201, 307, 308 — Construction 222 102 408 −34 0.67
304, 305, 306 — Petrochemicals 192 79 350 −47 0.80
310, 311, 313, 314, 366 85 743 −60 0.90
315— Manufacturing
312, 705 — Electronics 176 87 261 −6 0.62
701, 702, 703, 83 75 583 −22 1.57
704 —Transportation
401, 402, 501, 601, 294 98 1908 −1066 2.94
901— Services
102, 103, 303, 309 —Others 70 89 1671 −41 2.24
Total sample 1555 87 1908 −1066 1.69
Panel B: Taiwan
12 —Foods 25 132 605 20 1.04
14 —Textiles 50 152 763 42 0.83
11, 18, 20, 25 —Construction 75 650 4434 47 1.25
13, 17, 21 —Petrochemicals 46 108 253 30 0.52
16 —Manufacturing 12 147 241 84 0.35
15, 23 — Electronics 104 110 385 6 0.57
26 — Transportation 15 41 311 −57 2.02
27, 29 — Services 19 64 877 −153 3.41
19, 22, 99 — Others 33 106 659 −192 1.18
Total sample 379 219 4434 −192 1.96

The CCC measures have been rounded to the nearest number of days.
a
Industry IDs are presented.
b
Coefficient of variation.
 Y.-J. Wang / J. of Multi. Fin. Manag. 12 (2002) 159–169 165

Table 2
Pearson correlation coefficient for the CCC, ROA and ROE relationships by industry classification in
Japan and Taiwan

Industry CCC–ROA CCC–ROE ROA–ROE

correlation correlation correlation

Panel A: Japan
301 —Foods −0.10085 (0.0031) −0.10146 (0.0029) 0.84576 (0.0001)
302 — Textiles −0.03793 (0.3252) −0.05983 (0.1204) 0.73795 (0.0001)
201, 307, 308 — Construction −0.22291 (0.0001) −0.11599 (0.0001) 0.66612 (0.0001)
304, 305, 306 — Petrochemicals 0.10543 (0.0001) 0.00130 (0.9541) 0.68842 (0.0001)
310, 311, 313, 314, −0.15727 (0.0001) −0.15781 (0.0001) 0.79762 (0.0001)
315 —Manufacturing
312, 705 — Electronics 0.03835 (0.1116) 0.03863 (0.1089) 0.82025 (0.0001)
701, 702, 703, 704 —Transportation 0.05826 (0.0971) 0.03127 (0.3735) 0.51036 (0.0001)
401, 402, 501, 601, 901 — Services −0.15358 (0.0001) −0.05262 (0.0079) 0.52314 (0.0001)
102, 103, 303, 309 —Others −0.08761 (0.0167) −0.41849 (0.0001) 0.67859 (0.0001)
Overall sample −0.08296 (0.0001) −0.07242 (0.0001) 0.64842 (0.0001)
Panel B: Taiwan
12 — Foods −0.66021 (0.0001) −0.61689 (0.0001) 0.87888 (0.0001)
14 —Textiles −0.13993 (0.0025) −0.14746 (0.0014) 0.74875 (0.0001)
11, 18, 20, 25 — Construction −0.19674 (0.0001) −0.07165 (0.1007) 0.67747 (0.0001)
13, 17, 21 —Petrochemicals −0.16779 (0.0004) −0.12909 (0.0071) 0.68524 (0.0001)
16 — Manufacturing −0.34548 (0.0001) −0.29839 (0.0009) 0.57890 (0.0001)
15, 23 — Electronics −0.26832 (0.0001) −0.09440 (0.0258) 0.53082 (0.0001)
26 —Transportation 0.14659 (0.1265) 0.28175 (0.0029) 0.45418 (0.0001)
27, 29 — Services −0.02700 (0.7220) −0.01507 (0.8426) 0.69064 (0.0001)
19, 22, 99 —Others −0.05725 (0.3597) −0.06604 (0.2906) 0.38916 (0.0001)
Overall sample −0.12900 (0.0001) −0.05516 (0.0030) 0.51428 (0.0001)

Note: The P value is in parentheses.

the service industry, again, has the highest intra-industry volatility of the CCC
relative to the mean value. In Panel B, the lowest mean value of CCC is in the
transportation industry and the highest mean value is in the construction industry.
The construction industry produces the highest range of CCC values. When the
CCC standard deviation is divided by the mean level of the CCC, the service
industry has again the highest intra-industry volatility of the CCC relative to the
mean value.
Table 2 exhibits the Pearson correlation coefficients for the CCC–ROA and
CCC – ROE in each industry for Japan in Panel A and those for Taiwan in Panel
B. The correlation between CCC and ROA is significantly negative for five of the
industries in Japan, such as foods, construction, manufacturing, services and other
industries. As for the petrochemicals and transportation industry, significantly
positive correlations between the CCC measures and ROA measures are found. The
findings indicate that the CCC– ROA relationship is sensitive to industry factors
such as competitive forces, production processes and channels of marketing. In
general, the correlation between CCC and ROE is similar to CCC and ROA except
166 Y.-J. Wang / J. of Multi. Fin. Manag. 12 (2002) 159–169

for the positive correlation part. That is, the positive correlation between CCC and
ROE for the petrochemicals and transportation industries becomes insignificant.
Although the main difference between ROA and ROE measures is caused by debt
structure, the correlation between them is still positive and strongly significant for
all industries.4 In Taiwan, we can see that the correlation between CCC and ROA
is significantly negative for most of the industries except for services and other
industries. As for the transportation industry, positive correlation between the CCC
measure and ROA measure is found. In general, the correlation between CCC and
ROE is similar to CCC and ROA but with less significance.
According to Jose et al. (1996), larger firms tend to be more profitable and tend
to have shorter CCC. Therefore, size differences must be taken into account to
determine if the observed relationship between CCC and measures of operating
performance is mainly due to size factors. Size is measured by sales over the same
period. The log of sales is used to reduce both heteroscedasticity in the regression
model and the influence of outliers.
In the first column of Panel A in Table 3, simple regression analysis is conducted
to estimate the relationship between CCC and ROA for the Japanese sample firms.
It shows that the CCC– ROA relationship is significantly negative. In the second
column of Panel A, multiple regression analysis is conducted to estimate the
relationship between CCC and ROA with controlled size. The CCC–ROA relation-
ship is again negative and significant.
To examine the relationship between liquidity management and corporate value,
we divide the total sample into two groups using the cut-off point of Tobin’s q= 1.
In Panel A of Japan, the results for the q\ 1 group show that CCC is significantly
negatively related with ROA, with and without controlled size. As for the q0 1
group, the results reveal that CCC is significantly negatively related with ROA but
with less significance, independent of size. The size variable has a significantly
positive relation with ROA for the total sample and the q\ 1 group but has an
insignificantly negative relation with ROA for the q0 1 group. In the first column
of Panel B in Table 3, similar results are reported for the sample firms of Taiwan.5
Panel A of Table 4 indicates that the average CCC measure is significantly lower
for firms with q \ 1 than that of firms with q 0 1 in Japan. It indicates that
aggressive liquidity management is significantly and positively associated with
higher corporate values. In addition, the results of both ROA and ROE measures
for firms with q \1 are significantly higher than those of firms with q0 1. As for
the results of sales, firms with q \1 are significantly lower than firms with q0 1.6

4
Jose et al. (1996) note that most of the previous studies use ROA, instead of ROE measures, to focus
on operating efficiency and avoid capital structure differences. Nevertheless, liquidity management
affects the firm’s debt structure since it involves both asset and liability management.
5
All regressions in Table 3 were repeated using ROE as the dependent variable. The sign and
significance of the coefficient estimates from these regressions are all very similar to those reported in
Table 3.
6
The possible explanation is sale in this regression equation can be regarded as a proxy variable of
size, therefore, firms with smaller sales usually have higher growth potential (q \1) in both Taiwan and
Japan.
 Y.-J. Wang / J. of Multi. Fin. Manag. 12 (2002) 159–169
Table 3
Cross-sectional regressions of ROA on CCC and log sales for total sample and divided samples in Japan and Taiwan

Total sample Tobin’s q\1 Tobin’s q01

Panel A: Japan
Intercept 0.0425 (0.0001) 0.0037 (0.7380) 0.0458 (0.0001) 0.0104 (0.4176) 0.0275 (0.0001) 0.0463 (0.0008)
CCC −0.00002 (0.0011) −0.00002 (0.0005) −0.00002 (0.0011) −0.00002 (0.0020) −0.00001 (0.0814) −0.00001 (0.0828)
Lsales 0.0013 (0.0263) 0.0020 (0.0057) −0.0010 (0.1685)
R2 0.0068 0.0545 0.0083 0.0142 0.0114 0.0185
F-test 10.664 (0.0011) 29.821 (0.0001) 10.738 (0.0011) 9.232 (0.0001) 3.061 (0.0814) 2.489 (0.0849)
Panel B: Taiwan
Intercept 0.0750 (0.0001) −0.2116 (0.0001) 0.0792 (0.0001) −0.1809 (0.0001) 0.0498 (0.0001) −0.1789 (0.0345)
CCC −0.00002 (0.0002) −0.00002 (0.0062) −0.00002 (0.0004) −0.00002 (0.0087) −0.00002 (0.3657) −0.000008 (0.6380)
Lsales 0.0170 (0.0001) 0.0173 (0.0001) 0.0147 (0.0075)
R2 0.0353 0.1629 0.0386 0.1351 0.0155 0.1432
F-test 13.804 (0.0002) 24.321 (0.0001) 12.922 (0.0004) 25.075 (0.0001) 0.833 (0.3657) 4.344 (0.0180)

Note: Significance levels of t- and F-statistic are in parentheses.

167
168 Y.-J. Wang / J. of Multi. Fin. Manag. 12 (2002) 159–169

For Japan, the results in Table 4 tend to support the CCC–ROA relationships for
the different Tobin’s q groups demonstrated in Table 3. In all cases, the coefficient
on the CCC variable is significantly negative.
Panel B of Table 4 indicates that the average CCC measure is significantly lower
for firms with q \1 than that of firms with q0 1 in Taiwan. It again indicates that
aggressive liquidity management is significantly positively associated with higher
corporate values. In addition, the results of the ROA measure for firms with q\ 1
are significantly higher than those of firms with q0 1 but not in the case of ROE.
As for the results of sales, firms with q\ 1 are significantly lower than firms with
q0 1. Also for Taiwan, the results in Table 4 support the CCC– ROA relationships
reported in Table 3.

5. Conclusions

The empirical findings for both Japan and Taiwan show a negative CCC– ROA
and CCC – ROE relationships which is sensitive to industry factors. In general, the
results support Hager (1976), Kamath (1989), Soenen (1993), Jose et al. (1996), Shin
and Soenen (1998) that a lower CCC corresponds with better operating
performance.
With regard to the relationship between liquidity management and corporate
value, the empirical findings indicate that both Japanese and Taiwanese firms with
Tobin’s q \ 1 have significantly lower CCC than firms with q 0 1. In addition,
Japanese firms with q \1 have significantly higher ROA and ROE than firms with
q0 1. For Taiwanese firms, this holds for ROA but not for ROE. Overall, the
results indicate that aggressive liquidity management (reducing CCC) enhances
operating performance. Furthermore, aggressive liquidity management is associated
with higher corporate value for both countries in spite of differences in structural
characteristics or in financial system of a firm.

Table 4
The comparison of liquidity management, operating performance for divided samples in Japan and
Taiwan

Tobin’s q\1 Tobin’s q01 T-statistic

Panel A: Japan
CCC 75.7440 93.4811 1.9645
Lsales 17.8982 18.5269 7.0814
ROA 0.0440 0.0266 −8.4198
ROE 0.0255 0.0020 −7.6183
Panel B: Taiwan
CCC 212.8467 227.1056 1.6436
Lsales 14.9428 15.4179 3.2613
ROA 0.0738 0.0464 −3.5439
ROE 0.0654 0.0641 −0.0894
 Y.-J. Wang / J. of Multi. Fin. Manag. 12 (2002) 159–169 169

Acknowledgements

The author deeply appreciates the anonymous reviewers and Professor Ike
Mathur for their valuable comments and suggestions on earlier drafts. Any
remaining errors are the author’s.

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